Nigeria: when reasonable minds differ

In detailing Nigerian President Goodluck Jonathan's recent People's Democratic Party (PDP) primary win, making the so-called ”accidental president” the odds-on favorite to win April's poll, The Economist frets about his profligacy–a once $20bn pot of windfall crude revenues  in 2007 is suddenly worth about $300m, with “nothing to show for it,” for instance, per one Lagos-based analyst.  Moreover the FT noted last week that many investment houses shared the same sentiment while explicitly shunning the country's debut eurobond.  “Why does a country that relies for 90 percent of its income on oil, which has seen a big rise in price, need to run down its FX reserves,” mused one.  Against this backdrop the country's 2010 fiscal deficit worsened to 6.1% of GDP from 3.3% in 2009, missing the state's target of 4.8%.  That said, a la fin the $500m issue was more than 2x oversubscribed, and pricing, which translated into a yield of 7 percent, was within government targets, per beyondbrics.  So is this just another case of the sheer seduction of 150m people coupled with 36m barrels of proven oil reserves–a neat combo platter of global macro themes, namely favorable demographics consuming more while credit liberalizes for domestic firms and burgeoning EM demand and production factors squeeze energy supplies and prices going forward?  And are Nigeria's reserves destined to recoup themselves once delegates stop getting greased and arrears are cleared to multinational JV partners?  Maybe, maybe not.  Shell's recent asset divesture should raise red flags since it is a testament not only to stricter state terms with foreign firms, but also to the relative volatility of Nigerian oil volumes, which admittedly saw a 400kb/d recovery last year from the beginning of 2009 but could be destined to falter again in the impending election run-up (and subsequent violence?) much as they did in both 2003 and 2007.  To that end, the threat of violence is greater than ever according to some geopolitical analysts given the lingering and ever-widening rift within the PDP itself which could exacerbate regional, religious and ethnic tensions.  But on these issues reasonable minds disagree, which of course, is what makes a market.  In October Fitch lowered its sovereign outlook to Negative (BB-) from Stable, citing heightened political risk, the drop in FX reserves and the depletion of oil savings.  But at the same time S&P affirmed its ‘B+' rating with a Stable outlook, highlighting “a strong external and fiscal balance sheet and noting that it expects a better budgetary performance ahead,” per Barclays.  Additionally, advocates argue, the country's total debt ratio remains low at 16.5% of GDP, and growth–expected to exceed 7% in 2011–is still nowhere near its potential given capacity constraints such as a Flinstone-era electricity grid that will soon be privatized.  Moreover FX reserves, they point out, still cover roughly 15 months of imports (a “comfortable” amount, per analysts) and should stablize post-election.